Washington's Tax Compromise May Raise Reconciliation Possibility

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Of all the consequences of the compromise tax package that made it into law, one that’s been overlooked is that it may be easier for Democrats to raise taxes in the future, if they can win a majority in the House while maintaining control of the Senate and the White House.

Political pundits consider it unlikely one party can take both chambers anytime soon, but Democrats are closer to claiming such control and the law (PL 112-240) likely would give them a smoother legislative path to move tax legislation because of the way it changes the baseline for measuring the impact of changes in the tax code.

The change, the result of making some 99 percent of the 2001 and 2003 tax cuts permanent, effectively removes an obstacle to raising taxes through the procedural maneuver known as reconciliation, which does not allow for the use of filibuster and its 60-vote threshold.

Many have argued that the law, which allowed tax rates to go up on income for individuals beyond $400,000 and the income above $450,000 for households, may have made future tax increases more difficult by locking in the cuts for most income.

However, the arcane rules that govern the congressional budget process can work the other way.

For many years after Congress passed the massive tax cuts during the George W. Bush administration, lawmakers have talked about future tax policy under two separate assumptions, one that the tax cuts would be extended and the other that the tax cuts would expire. Those assumptions formed the basis of different budget baselines — a “current policy baseline” generally used by lawmakers as they debated whether or not to raise taxes and a “current law baseline” safeguarded by the official budget scorekeepers.

The difference between the two baselines was dramatic, with the policy baseline counting elimination of some of the cuts as a tax increases and the law baseline regarding changes as reductions because the temporary tax cuts were, after all, scheduled to expire unless Congress intervened. The deal the White House and GOP leaders eventually reached was a $620 billion tax increase using the current policy baseline but a $3.9 trillion tax cut when measured against the current law baseline.

Either way, making the rates permanent removes some confusion by bringing the official, current law budget baseline that is used by the Congressional Budget Office and the Joint Committee on Taxation much closer to the policy baseline.

That will make reconciliation easier for lawmakers to use because, among other restrictions on the maneuver, reconciliation bills must change revenue or spending levels and can only be permanent if they do not add to the deficit relative to the CBO baseline.

Until this month, “it would have been difficult for reconciliation to have been used, given the current law baseline,” said Joel Friedman, the vice president for federal fiscal policy at the Center for Budget and Policy Priorities who until recently was the deputy Democratic staff director on the Senate Budget Committee. “Now it would be easier.”

Under reconciliation rules, Congress can pass a joint budget resolution and then subsequent legislation without a threat of a filibuster in the Senate. Reconciliation was key to enabling congressional Democrats and President Bill Clinton to pass a tax increase in 1993 without a single Republican voting in favor of the legislation (PL 103-66). Democrats again contemplated using the tactic to extend middle-income tax cuts and eliminate upper-income tax breaks when they were scheduled to expire in 2010. But the rule against adding to the deficit beyond the 10-year budget window was one reason they decided against the strategy, a Senate Democratic aide said this week.

Now, as in 1993, a bill that is viewed as a tax increase by many lawmakers would also be seen as a tax increase by the CBO. It could therefore be freely considered under reconciliation rules, enabling it to be passed by the Senate with only 51 votes instead of the 60 normally needed to limit debate on a measure.

The procedural hurdles are separate, however, from the political hurdles. The prospect of passing a tax increase through reconciliation does not seem to have factored into the thinking of Democrats who helped write the compromise tax package. To even consider the maneuver, Democrats would first need to gain control of the House, where Republicans currently hold a 33 seat advantage.

For now, Democrats are focused on raising additional revenue by scaling back tax breaks and using the money to partially replace across-the-board discretionary spending cuts scheduled to take effect on March 1.

Republicans have vowed to resist any more tax increases. They argue that the appropriate level of tax revenue has been settled and that only alternative spending reductions are an appropriate way to turn off the sequester.